The Fed accelerated what was its now expected level of rate cut, 75 basis points, from its scheduled January 29 Fed Open Market Committee Meeting to today, putting the target Fed funds rate at 3.5% and the discount window rate at 4%, The prospect of the S&P and Dow opening down appears to have focused their mind (and also dispelled any doubt that the Fed, which most assuredly does not have the stock market as its job, has somehow now started seeing that as part of its charter). A related story indicates that S&P futures responded, shaving their decline by nearly 50% to 3%.
The Federal Reserve lowered interest rates in an emergency move for the first time since 2001 after tumbling global stock markets and a jump in the U.S. unemployment threatened to push the economy into recession.
The central bank lowered the benchmark overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Policy makers weren’t scheduled to gather on rates until Jan. 29-30.
“While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate,” the Fed said in a statement in Washington. The FOMC took the action “in view of a weakening of the economic outlook and increasing downside risks to growth.”
Policy makers set aside concerns about inflation to lower borrowing costs for the fourth time since September after unemployment hit a two-year high and U.S. stocks slumped. Chairman Ben S. Bernanke shifted the Fed’s stance to a more- aggressive approach in remarks this month citing a need for “decisive and timely” action.
Yesterday, almost half of the world’s biggest stock indexes fell into a bear market as mounting concern about a U.S. recession dragged down banking and retail shares across Asia, Europe and Latin America. Today, futures pointed to the biggest decline in the Standard & Poor’s 500 Index since September 2001.
The Fed Board of Governors, in a related move, lowered the so-called discount rate on direct loans to commercial banks by a 0.75 percentage point to 4 percent.
The FOMC vote was 8-1, with St. Louis Fed President William Poole preferring to wait until the regularly scheduled FOMC meeting. Fed Governor Frederic Mishkin was absent and not voting.
Today’s so-called inter-meeting rate cut is the first since Sept. 17, 2001, when the Fed lowered borrowing costs in the aftermath of the terrorist attacks six days before. That was the third emergency reduction in a year which saw the last U.S. recession.